Examining the link between teacher wages and student outcomes: The importance of alternative labor market opportunities and non-pecuniary variation

Researchers using cross-sectional data have failed to produce systematic evidence that teacher salaries affect student outcomes. These studies generally do not account for non-pecuniary job attributes and alternative wage opportunities, which affect the opportunity cost of choosing to teach. When we employ the methodology used in previous studies we replicate their results. However, once we adjust for labor market factors, we estimate that raising teacher wages by ten percent reduces high school dropout rates by three to four percent. Our findings suggest that previous studies have failed to produce robust estimates because they lack adequate controls for non-wage aspects of teaching and market differences in alternative occupational opportunities.